What’s Behind Japan Capex Surge? Old Windows May Play a Role

The surprise upward revision to Japan’s gross domestic product for the first quarter of 2014 might have been helped along by an unlikely source: Microsoft’s decision to end support for its Windows XP operating system.

The Japanese government said Monday that real GDP grew 6.7% on an annualized basis in the January-March quarter, higher than a preliminary estimate of 5.9% issued three weeks ago. The change was “a surprise for many,” said Norio Miyagawa, a senior economist at Mizuho Securities Research and Consulting.

Many economists were expecting the GDP figure to be revised down, to 5.0%-5.5%.

The biggest contributor to the upgrade was corporate capital spending, which rose 7.6% from the previous quarter period – far more than the 4.9% growth in the initial estimate. The government doesn’t release details of investment.

But economists said one likely factor was purchases of new computer hardware or software related to Microsoft ending support for its old operating system in April.

“It’s hard to estimate how much it contributed to overall capital spending, but judging from related surveys, corporate demand was strong. So it’s probably not something you can ignore,” said Yuki Endo, an economist at Hamagin Research Institute.

According to the International Data Corporation Japan, 17.1% of all computers at Japanese companies still used Windows XP as of last December, down from 30.4% in June. The IDC expects 6.6% of corporate computers in Japan will still be running XP as of June 2014.

According to the Japan Electronics and Information Technology Industries Association, 1.64 million new computers were shipped in Japan in March, up nearly 21% from a year earlier. That was the highest volume since the survey’s current format began in April 2007.

Shipments in April were up 46.9% from a year earlier to 954,000 computers. A spokeswoman said the association expects shipments to remain strong due to XP-related demand “at least until June.”

Computer companies are looking for ways to encourage that demand. Fujitsu, for example, extended a trade-in program for companies looking to replace machines running XP. The measure was initially scheduled to end last October but was extended to this March, then extended again to October 2014.

“It turned out demand remained strong, so we ended up extending the program twice,” Fujitsu’s spokeswoman said.

Until recently, economists hadn’t expected to see any frontloading of capital spending ahead of the increase in the sales tax – which rose to 8% from 5% as of April 1 — because of various exemptions granted for investment.

Still, operating-system upgrades are a one-off factor, meaning corporate capital investment could weaken again in the April-June quarter.

“Although a cyclical recovery in capital investment certainly seems underway, as the earnings recovery has unleashed pent-up demand, we feel spending to expand domestic production capacity will likely stay limited owing to long-term considerations such as population decline,” BNP Paribas chief economist Ryutaro Kono wrote in a research note.

Hamagin’s Mr. Endo is more optimistic about investment going forward, because Japanese companies are becoming more profitable and will need to replace aging machinery. Japan’s stock of machinery is among the oldest in industrialized nations.

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